LCC for Freight Carriers

[wndshr]

i was flying to FLL yesterday and was eavesdropping on an interesting conversation. the pax i was sitting next to was talking to a proclaimed management type from B6....

the B6 management guy was (as anyone could imagine) very excited about the introduction of the rj. the interesting part started when the b6 guy started talking about the introduction of a LCC into the freight market! he didn't say it was going to be B6 or not B6...just a LCC entrant into the freight market. he said it has been tried before but never done right....however, according to him, there is a huge market for a highly capitalized business venture that would take the inefficiencies of the current freight market and introduce a brand that could potentially compete with the likes of UPS and FedEx.

i was thinking....yeah...riiiiiiiiiiigggggggghhhhhhtttttt. but then again, isn't that what b6 has done to legacies so far?

i know nothing about the freight market, so freight types please explain how this would never work!

sidenote: wasn't fred reid laughed out of grad school about his idea?

 

[fr8doggie]

Who's "Fred Reid"?

 

[FlyBoeingJets]

Excellent question. Anyone considering FedEx or UPS as a career, or career change, should consider it.

I personally think it will be hard to fight the barriers to entry in cargo. FedEx,UPS, and Astar/DHL have big bucks tied up in distribution centers and plan to spend even more in the years ahead. They have established customers and retail stores. FedEx just announced they will spend $1.8 Bill on 4 new distribution centers. The one in ATL will be 3 times as big.

I'm open to new thinking on the subject, but who is going to risk the huge capital outlays to fight these guys?

What I am concerned about is contract carrier flights (wet lease?) for FedEx and UPS. I wonder if it will affect hiring/advancement.

 

[katanabob]

The problem with the idea of an LCC in the cargo business (at least, the market share of UPS and FedEx) has to do with the principle of 'barriers to entry'.

In the passenger industry, you can quite literally take one airplane and two cities.. and voila- You have an airline. You can sell tickets between those two cities and as long as there are enough people willing to travel between them and you are priced competitively, you have a market. Barrier to entry is low.

In the package-delivery world, though, you can't just serve two markets. Imagine the problem if you had to turn away every customer who didn't want to ship a package from, say, Dallas to Long Island. You have to be able to serve a significant portion of the market to attract business. Basically, you have to serve everywhere or nowhere. Barrier to entry is high.

There is an inherent inefficiency when you try to serve everywhere. The LCCs have been able to pick markets and thus be vastly profitable. (Until this quarter, actually) The 'Legacy' carriers have tried to serve every market (hence the RJs, etc.) and have realized the diminishing return of trying to do so. (The incremental gain in profit from flying airplanes around that are near their break-even point versus the gain in ability to provide more service. Revenue increases but profit does not. Margins go down.)

As a side note, I think you meant Fred Smith. (Founder and CEO of FedEx) He didn't get laughed out, but he did get a 'C' (if I recall the story correctly) on a paper written at Yale describing what would become FedEx.

 

[Clyde]

LCC Freight

I think it's entirely possible, but not highly probable. As someone mentioned before, who is willing to risk that much capital to enter a market dominated by UPS, FedEx, and DHL?

For starters, one would have to invest in airplanes, and ones that are going to have a high rate of reliability. Next, they would need an infrastructure. i.e., places to sort the freight/packages, distribution, and forwarding just for starters. How is the package going to reach the customer? Going to have to also start some type of ground-based network. i.e., a trucking side. The customer is going to want the ability to track his/her package (probably online) and that technology isn't cheap.

Will a LCC-freight outfit be able to provide more than just package delivery? Something UPS (I don't know enough to be able to speak on behalf of FedEx) can do for it's customers is to provide a level of service above and beyong delivering the package. Warehousing, distribution, supply-chain management, etc.

On top of all of this, UPS and FedEx have HUGE customer bases, similar to what Coke and Pepsi have. Think it would be easy to lure the customer away from them? Again, possible, but not highly probable.

One also has to ask what particular type of market a LCC-freight carrier would aim for. Do they want to haul large bulky freight such as generators across the ocean to Asia, or do they want to haul small packages. The profit margins are a lot higher on small parcels (more money in it), but one couldn't come in and start a LCC-cargo airline as quickly as one could an LCC-pax operation.

True, the LCC's have swayed long-time customers away from the legacy carriers in recent years. However, look at the circumstances. Someone could pay $1200 to go from A to B on a legacy carrier, or pay $400 on an LCC. In the package business, you might pay anywhere from $40 to $200 to ship a package overnight. In some cases, less than $20 to ship a letter. I doubt anybody is going to come into this market and guarantee next-day service or even second-day service at prices 30%-40% cheaper and still be able to provide a comparable level of service.

And, speaking of service, the LCC's have entered the industry with less expensive fares over the years because of things such as one-class seating (I know, not on all) no fancy meals, and more point-to-point service.

A package customer doesen't care if the letter/parcel is shipped non-stop or if it changes airplanes. All they care about is that it reaches it's destination in a timely manner. The difference in price that a hypothetical LCC cargo outfit could produce probably wouldn't be that much to warrant a lot of people's heads to turn. Ever try some no-named brand soda over Coke or Pepsi because it was $0.25 cheaper? Was it worth it? Most people realize you get what you pay for.

All in all, while this type of outfit MAY succeed in the heavy-lift market, I highly doubt it would succeed in the small package market. Unless financed out of pocket, one would have to leverage very highly and the probability of success is low enough that it would probably bankrupt them their first year. Yes, people lauged at Fred Smith, and yes FedEx did it. But, that was 1970 and there weren't too many of these outfits around back then.

 

[Ty Webb]

Well, I think you guys are overlooking the obvious. A freight LCC wouldn't look to emulate UPS and Fedex's system, it would simply cherry-pick certain routes and target certain customers . . . for example, start serving YIP and cities served by automotive manufacturers, or San Jose and Taiwan.

That's one of the reasons LCC's have lower cost- they don't have the massive infrastructure. If it costs $7800. to fly a 717 from ROC to ATL and it carries 20,000# of cargo, it could do it for well under a dollar a pound, with contracts with a few big companies. Contract between a few pharmaceutical companies, sub out the trucking back and forth . . . . and you get the idea.

 

[Publishers]

Even more difficult than the flying part of the equation is the ground delivery operation. Pick up is easier because for the most part you can schedule a route that hits shippers more easily than the delivery process which can go anywhere.

 

[Mr Zog]

Ty,

So you think you can start a LCC freight carrier and just fly to Taiwan and say "Here I am"? Slots into and out of China, Taiwan, Tokyo, Hong Kong, etc are extremely competitive. I don't think the DOT is going to give those slots to an outfit with a small number of planes. I mean American Airlines has been trying to get slots into Shanghai for the past couple of years. Can you start a freight service from LAX to JFK? Sure, who knows maybe you could find a niche in the US. But to just start in the highly profitable international market, I think the barriers are a bit larger.

 

[pilotyip]

LLC cargo already in operation

It is called the on-demand business and no one can do it lower than those guys between two pionts. Zantop tried to do it with outsided carg at the YIP hub for years. They had all the major cities 500K+ connected via air and truck. Did not do them much good, and there was no airplane cheaper to operate than the L-188 for 35K of lift. LLC package is already defined by ABX, there package shipment cost is well below the other two, and they are not exactly booming. So I am not sure what LLC cargo would look like.

 

[Clyde]

It is called the on-demand business and no one can do it lower than those guys between two pionts. Zantop tried to do it with outsided carg at the YIP hub for years. They had all the major cities 500K+ connected via air and truck. Did not do them much good, and there was no airplane cheaper to operate than the L-188 for 35K of lift. LLC package is already defined by ABX, there package shipment cost is well below the other two, and they are not exactly booming. So I am not sure what LLC cargo would look like.

Aren't the profit margins and stability much lower for the type of business Zantop was in than for the type of business ABX is in?

 

[Ty Webb]

Ty,

So you think you can start a LCC freight carrier and just fly to Taiwan and say "Here I am"? Slots into and out of China, Taiwan, Tokyo, Hong Kong, etc are extremely competitive.

Give me a little credit, Sparky. I was merely stating that it is not that remote of a possibility that you could see not only domestic LCC freight, but also internationally. I used Taiwan and San Jose as an example because they have a common industry.

It seems to me that the guys who are arguing that this can't happen are the guys who have the most to lose if it does happen . . . . kind of like the same stuff we used to have guys saying on this board four or five years ago about LCC's.

"The LCC's will never have a significant share of the market, because . . . ________ [insert your particular reason here]" .

 

[klhoard]

LCC's in the cargo industry. . .

I think it would be an awesome idea. . . Imagine how much revenue you can generate by by palletizing your passengers!!!
.
Another great marketing idea would be that you could pick up and deliver your passengers door to door!!

I think it is only the natural progression of the market. . .
.
.

 

[Clyde]

Give me a little credit, Sparky. I was merely stating that it is not that remote of a possibility that you could see not only domestic LCC freight, but also internationally. I used Taiwan and San Jose as an example because they have a common industry.

It seems to me that the guys who are arguing that this can't happen are the guys who have the most to lose if it does happen . . . . kind of like the same stuff we used to have guys saying on this board four or five years ago about LCC's.

"The LCC's will never have a significant share of the market, because . . . ________ [insert your particular reason here]" .

I have to partially disagree with you on this one. True, I can see a LCC freight operation starting up, but not on the scale of a UPS/FedEx/DHL sized company.

It's apples-to-oranges when you compare an LCC pax to a potential LCC freight market. In all actuality, the airplanes are just one small part of the operation that would have to be purchased and put into play. It's the infrastructure and the customer base that would have to come to light.

How long do you think it would take to accumulate a customer base that is comparable in size to that of the big parcel carriers? And keep in mind, that these same companies already branch out internationally.

A LCC pax airline pax uses those airlines to travel within the lower 48, and possibly to Canada and Latin America. That same person would have to travel on a different carrier to go overseas.

A customer who wants to ship multiple parcels (a business for example) to many different parts of the world is more than likely going to ship it through one shipper. i.e., UPS, FedEx, or DHL. Why? Because of the ease of having one company handle all of their needs. It would take years, if not decades, for a start-up LCC freighter to even think about rivaling what's already there.

And again, the delivery is only one aspect. UPS for example, can handle all of it's customer's needs from warehousing, logistics, forwarding, and delivery.

A LCC-freight carrier starting up has a lot more to think about than just airplanes.

One more thing. Just a few years ago, we had American, Delta, United, US Airways, Northwest, and Continental as the big, profitable legacy carriers. Then, you had Southwest, AirTran, Frontier, and a few others on scene as the discount carriers, as the general public would refer to them as.

Fast-forward to now. It's a huge hodge-podge of legacy and LCC all fighting for business and seeing who can offer the lowest fares on similar routes. Add to that the fact that the typical airline passenger wants the lowest fare and doesen't care who they are flying on.

My point is this: there is overcapacity in the passenger side of things. The barriers to entry (as one pointed out in an earlier post) are not as great on the passenger side. The differnce in prices of tickets can be as much as 40% and higher between legacy and LCC carriers.

You don't see that on the parcel/freight side. You can't offer a product or service 30% less than that of UPS/FedEx/DHL and expect to stay in business.

You have to look beyond the airport and at the roads for this one. Look at all of those trucks driving around out there in brown, purple, and yellow and ask yourself this: "could I compete against all of those trucks on a daily basis?" Then ask yourself this question: "could I meet all of my customer's needs beyond just delivering a package?"

This is a lot more complicated than just throwing a few DC-9's (or A320's, or 737's) up at the airport and offering low fares to a few city pairs.

Again, it's apples to oranges.

 

[Ty Webb]

I think you're missing the point, Clyde. The point isn't that there is some LCC on the horizon that will start doing small package delivery.

It is that it would be very possible to cherry-pick large accounts and/or industry city/pairs. Fly trailerloads, not be all things to all people. That's the LCC way.

 

[wndshr]

Who's "Fred Reid"?

oops!!!! brain fart! fred smith!

 

[profile]

2 points being missed in all this:

1. Everyone is forgetting the ultimate in LCC in the express biz, USPS. Already here and cheaper for those that want that, and;

2. There ARE already little carriers that serve one market, but for them to make a significant dent in the biz of the big 3 (4 including USPS), is very unlikely.

3. The cost savings of running a big hub and spoke allow for a lot more competitive pricing because the "convenience" factor of a non-stop is just not a player. All that matters is that the product gets to the destination reliably, consistently. That new little LCC's airplane breaks and they can't recover just once, and it's all over. Not an issue with the pax side. The larger carriers have the ability to recover the freight through alternative means, and THAT ability is what differentiates them more than anything else.

 

[Ty Webb]

I don't think anyone here is talking about a "new little LCC that is in trouble if their plane breaks", anymore than American was talking about that "little, bitty 737 outfit over at Love field".

I think what is being speculated about here doesn't have anything to do with the USPS, either. My bet is that when it happens, it'll be high-volume, cherry- picked routes, serving a few thousand major customers in a few dozen easily-accessible destinations . . . . in other words, they'll just skim off some of the cream.

 

[profile]

Already been tried, I think....

 

[wndshr]

what about a LCC outsourcing?

i know the majors have scope clauses and i am sure the cargo guys do too....but if they didn't have scope, what would be the impact of FedEx and UPS outsourcing more and more freight to lower "mesa type" bidders?

to what extent do the polar/atlas kalitta and etc contract freight for FedEx or UPS? or do they?

 

[profile]

If it was better to operate thru the sub's, then both UPS and FedEx would be doing it. Neither set themselves up that way, and UPS intentially went away from that in the early 80s. Operational control is the key, I think.

 

[ProLine4]

My bet is that when it happens, it'll be high-volume, cherry- picked routes, serving a few thousand major customers in a few dozen easily-accessible destinations . . . . in other words, they'll just skim off some of the cream.

Isn't this role currently filled by the likes of existing 121, supplemental 121 or 125 carriers?
The US already has operators that can contract quite easily fill the void in markets where additional lift is needed. Also, those carriers have the ability to offer ACMI "wet" or dry leases to other airlines as needed (Southern & China Cargo, Atlas & China Airlines Cargo, World and everyone under the sun, etc).

The infrastructure costs alone to support an LCC operation IMO are prohibitive. It would have to be incredibly capitalized to start up the operation, and these expenses would certainly have to be passed on to the new customers. About the only way they might be able to do it would be to operate at citypairs where they solely can rely on freight consolidators and forwarders to fill their flights. But again, that's quite a risk as an upstart company to place the ground portion of your operation in the hands of another company.

 

[iaflyer]

i know the majors have scope clauses and i am sure the cargo guys do too....but if they didn't have scope, what would be the impact of FedEx and UPS outsourcing more and more freight to lower "mesa type" bidders?

I think one aspect preventing much outsourcing (beyond scope) is reliability. Sure, the lowest bidder, airline X can fly the route, but can they do it five or six times a week, every week, as well as recover to mechanicals and the like? It's easy for a lower cost carrier to pick one or two flights, but to do it ever day?

Reliability is key in the express business. All it takes is one package that's contains a contract worth $100,000 to go missing - that company might never use you again. Multiple that by all the packages on one broken airplane. Fedex Express moves 3.3 million packages every night, 99.9% reliability just isn't good enough.

To what extent do the polar/atlas kalitta and etc contract freight for FedEx or UPS? or do they?

On the Kalitta side, very little. I believe UPS has a pretty good scope preventing this type of thing. I have no idea what the UPS scope says, but I *think* Kalitta has picked up some UPS logistics work on a temporary basis in the past. The kind of stuff that is too short for UPS to buy airplanes and staff for.

I have seen an Atlas airplane using a Fedex callsign - what it was doing, no idea.

iaflyer

 

[Clyde]

I don't think anyone here is talking about a "new little LCC that is in trouble if their plane breaks", anymore than American was talking about that "little, bitty 737 outfit over at Love field".

I think what is being speculated about here doesn't have anything to do with the USPS, either. My bet is that when it happens, it'll be high-volume, cherry- picked routes, serving a few thousand major customers in a few dozen easily-accessible destinations . . . . in other words, they'll just skim off some of the cream.

I think you are overlooking a major point here: the one thing American and Southwest both have in common is that they offer ONE service: taking a passenger from one airport to another. That's it.

How much infrastructure do you need to start a LCC passenger operation? Not a whole lot. Buy a few airplanes, lease a few gates, and serve a few cities.

Can you honestly see UPS or FedEx leasing out some of it's space at their sort centers for some start-up LCC cargo outfit? Can you see them leasing some of their trucks to move the parcels? Nope.

And that's my whole point. Starting an ANY cargo airline requires much more than just buying the airplanes. The cargo business is an entirely different animal than the passengers.

Also, for an airline to offer the customer the level of service that one would find at UPS or FedEx and then offer it at a much lower price, would be insane. They would be bankrupt in less than a month.

Why do you think there are still so many people out there still trying to start-up all of these LCC pax operators, but you don't see anyone starting from scratch saying "let's take on the UPS's and FedEx's of the world". Because they know they can't.

One final point: UPS has BILLIONS of dollars. They are very diversified. They can do anything they want. If a LCC cargo operator tried to take them on, UPS could lower their prices below that of the LCC competition and keep them there until the smaller one is out of business. The legacy carriers on the pax side of the airport didn't have that luxury. That is the only reason the LCC's have made it this far.

 

[Clyde]

i know the majors have scope clauses and i am sure the cargo guys do too....but if they didn't have scope, what would be the impact of FedEx and UPS outsourcing more and more freight to lower "mesa type" bidders?

to what extent do the polar/atlas kalitta and etc contract freight for FedEx or UPS? or do they?

To answer your outsourcing question, it has to do with control. If a feeder flight full of passengers is late, you've upset probably 50-100 people. Chances are, most of them will choose your product again. Out of say 100 people, you might see half or slightly more than half of them miss a connection. That won't delay the entire operation of the mainline airline.

Go to the cargo side for a minute. When a 757 is fully bulked out, it has close to 80,000 packages on board. You could also think of it as 80,000 customers. If these packages don't arrive on time or within a reasonable amount of time, there are going to be a lot of angry customers. If this plane, or more are late inbound to the sort centers, it could wreak havoc on the entire system. The more you subcontract, the less control you have. The more control you have, the greater the odds your operation will run on time. The package haulers have more to lose than the passenger carriers do if things don't happen when they are supposed to.

With contractors flying that much bulk around the system, anything could happen and you may or may not have a say in it. The only thing guaranteed is that you will have to answer to your customers.

 

[profile]

Both UPS and FedEx do some wet leasing during peak to even out the demand. UPS has, historically, done more than FedEx, in that regard. I assume that DHL is similar, but they do more belly freight for their core movement.

All the companies use belly freight to move that which is unable to move on their airplanes. I assume they all charter aircraft as required, also, to make delivery commitments.

The Atlas charters are for a specific customer out of Asia that needs 747s at certain times of year.

All of them already have their "regional" fleets to get items to the smaller cities.

I don't think that the cost of crews is a big player for the big three. Think about it. The airplane costs are the same, probably less if you operate them yourself. The ground crew costs, they all use part timers, etc, so that's pretty low. The cost of truck/van drivers is all about the same, a market rate, if you will.

What percentage is crew costs here? Is there a possibility of enough savings to make a LCC worthwhile? Where do the savings come from that are enough to justify the start up costs? What is the biz model that saves money?

In terms of farming out the flying, consider: The loss of custodial control costs how much in terms of reliability compared to the crew costs, if flying is farmed out? If you farm it out, the other operator needs to make a profit, so that thins out any advantage in that area, and the rest of the costs are the same either way. Still needs all the ground crews, etc. Now you can't control the operation, the ops specs, who have an intermediary on deciding where the aircraft go (not just a flight dispatcher decides where to divert in this kind of operation, unlike a pax one).

Much more complex system, overall.

 

[wndshr]

freight drivers....how often do you have mechanicals that could disrupt the sked and how do you plan for them? extra a/c on stby? now if you sub out they certainly can't provide extra a/c in case their a/c goes T/U...right?

how are mechanicals looked at by management...better have a really "good" reason to delay/cx or else a carpet dance in the chief pilots office? mx must be awesome because you never hear of mechanical issues with freighters...and fedex has the majority of older planes too!

 

[Ty Webb]

One final point: UPS has BILLIONS of dollars. They are very diversified. They can do anything they want. If a LCC cargo operator tried to take them on, UPS could lower their prices below that of the LCC competition and keep them there until the smaller one is out of business.

You guys are cracking me up. This statement could have been made by a Delta pilot in 1998 . . . . . . Today, AirTran has a higher market cap then Delta.

Anyone that thinks that their industry or carrier is immune to the forces of change is probably going to be the least prepared when it happens.

And if there is a terrorism event on the cargo side . . . . all bets are off.

 

[Big Beer Belly]

freight drivers....how often do you have mechanicals that could disrupt the sked and how do you plan for them? extra a/c on stby? now if you sub out they certainly can't provide extra a/c in case their a/c goes T/U...right?

how are mechanicals looked at by management...better have a really "good" reason to delay/cx or else a carpet dance in the chief pilots office? mx must be awesome because you never hear of mechanical issues with freighters...and fedex has the majority of older planes too!

With 270 (approx) aircraft, it's safe to say UPS deals with mechanicals EVERY night as I'm sure FedEx does. UPS plans for them by having a substantial number of spare aircraft capable of launching every day and pre-positioned in at least a half dozen major gateways spread across the US. Each afternoon, UPS has approximately a dozen aircraft already pre-flighted, empty, sufficiently fueled, and cockpit "sealed", capable of being launched within 30 mins, with crews standing by in facilities just waiting for the call to launch. Years ago we used to launch two empty aircraft, fully fueled, and have them orbit over the Great Lakes and Southeast US and divert them as required to "rescue" volume due to mechanicals or whatever. Why go to such great lengths to "protect" the volume, you say? Well, as another UPS pilot previously explained, between senders and receivers, UPS stands to lose as many as 100,000 customers for each flight that fails to make service. Additionally consider that most all air volume comes with a money-back guarantee if your package is not delivered as promised (exceptions for "acts of God", wx, etc...) and you begin to understand the mindset and competitive pressure UPS is under.

To a pax pilot, this type of backup (wasteful inefficiency?) is unthinkable. In the pax industry, flight cancellations are routine. Simply book the cancelled pax on a later company flight or book them on a competitor ... no big deal. In the express package industry, flight cancellations are nearly unheard of ... and I mean that quite literally. About the only time UPS cancels a flight is if the airport authority has closed an airfield or the weather absolutely prohibits the landing (i.e., a hurricane). There is simply far too much in terms of revenue and customer loyalty at stake to even entertain the notion of a flight cancellation.

Some quick UPS facts to help understand the size of the operation ... UPS is the world's largest transportation company and the world's 11th largest airline. It employs in the neighborhood of 370,000 people and serves over 200 countries and territories. It owns approx 270 large jets and over 100,000 delivery vehicles. With all shares of stock considered, it has an approx $100 billion market capitalization. UPS spends more than $1 billion each and every year on information technology. By any measure this company is large, profitable and a determined competitor in the transportation industry.

Finally, it is my opinion that the mechanics at UPS are some of the finest (if not THE finest) in the industry. In all fairness, aircraft utilization rates at UPS are just a fraction of their pax counterparts and this additional "down time" allows more time to work mechanicals and return the jets to service promptly.

 

[Mr Zog]

Ty,

I don't mean to burst your bubble. I think the jest of the matter is that pax and cargo are different. It would be difficult to be a start-up in todays freight industry. UPS/FedEX/DHL can go to a company and offer a wide range of options (overnight express, 2 or 3 day delivery, ground shipment, custom critical, international, door-to-door, etc). Are the cargo companies invincible? NO.
Is our management aware of the competition? Yes. DHL starts an aggessive campaign in the U.S., rumors of a FedEx domicile in Europe and expanded operations there begin. Coincidence? Maybe.

By the way, my name is not Spanky. Thanks.

 

[klhoard]

. . .<snip>.>

And if there is a terrorism event on the cargo side . . . . all bets are off.

Not sure what you're getting at, but I can pretty much guarantee that those boxes won't be scared to get on a jet.